Global Capital Flows and the Role of Macroprudential Policy

Sudipto Karmakar and Diogo Lima

No 2019/87, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: Can countercyclical bank capital requirements reduce the negative effects ofglobal liquidity shocks? We use the Lehman Brothers bankruptcy as a natural experiment to document the role of the banking system as a transmission channel of global financial disturbances to domestic economies. Using granular and confidential data from the Bank of Portugal, our results suggest that in the aftermath of the Lehman collapse, domestic firms cut investment by 14% and employment by 2.3%.In order to evaluate the effectiveness of macroprudential regulation, we model an open-economy with a banking sector borrowing from domestic and in-ternational depositors. We show that, during a financial crises, in an economy with counter cyclical bank capital requirements(compared with an economy with constant capital requirements):(i) gross domestic product falls 5 p.p. less and (ii)the fall in investment is 3 p.p. lower. We show that imposing countercyclical capital requirements entails a trade-off between lower volatility and lower economic activity.Overall, we find that countercyclical bank capital requirements may not be welfare improving for the Portuguese economy.

Date: 2019-07
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://rem.rc.iseg.ulisboa.pt/wps/pdf/REM_WP_087_2019.pdf (application/pdf)

Related works:
Journal Article: Global capital flows and the role of macroprudential policy (2023)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ise:remwps:wp0872019

Access Statistics for this paper

More papers in Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa ISEG - Lisbon School of Economics and Management, REM, R. Miguel Lupi, 20, LISBON, PORTUGAL.
Bibliographic data for series maintained by Sandra Araújo ().